Can Massive Investment Turn Social Networking Into Real Revenue?
It looks like Facebook is the first of the social networking sites to make a move to address the issue of generating revenue from its enormous volume of traffic. Rather than have its over 200 million users pay for the value of its service, Facebook has received an injection of cash from a major investment company.
Digital Sky Technologies, a Russian Internet investment company, is paying a whopping $200 million to own a 2 percent share in Facebook. The company is controlled by successful Russian Internet Entrepreneur Yuri Milner.
In addition to the investment, Digital Sky Technologies has agreed to buy $100 million of ordinary shares from existing Facebook shareholders.
You might recall that Facebook faced a similar infusion of cash from Microsoft in 2007. In that deal, Microsoft paid $240 million for a 1.6 percent share in the company.
It’s interesting to note that in 2007, Facebook’s value was placed at $15 billion. With the 2009 Digital Sky Technologies deal, Facebook’s worth dropped to $10 billion. The decline can be attributed to the frustration among investors that Facebook fails to capitalize on its 200 million users worldwide by instituting some form of revenue-generating program. In fact, Facebook’s private equity investors value the company at only $3 billion.
So what can we expect from the deal with Digital Sky Technologies? Facebook investors might see some movement toward profitability when you consider that Digital Sky Technologies is the market leader in social networking in 13 countries. It recognizes the extraordinary value social networking companies provide to its users. The company has also had impressive financial results in its Internet investments.
But when talking about the deal, Facebook CEO Mark Zuckerberg said little on the revenue-generating topic. Rather, he viewed the investment as a means of globally expanding Facebook’s reach for its millions of users.
Although Facebook officers deny that the deal was made because the social network company needed additional cash, only time will tell the financial outlook for Facebook. Zuckerberg has gone on record as saying he anticipates Facebook having positive cashflow in 2010. How the company plans to achieve that outcome remains to be seen.
All eyes will be on Facebook in the coming months to see whether Digital Sky Technologies makes any impact on turning Facebook’ mega traffic numbers into revenue. What are your thoughts about Facebook’s new investor? Leave us a comment and let us know what your expectations are from the deal.
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Adam Toren
